For This Trio, Forget China And Think Mexico

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Everyone is talking about China, but for a trio of international companies Mexico is a bigger story. It's so big that trouble in that single country caused Western Union (NYSE: WU) to lose a third of its value late last year.

South of the Border

Western Union is one of the world's largest money transfer services. It has around 500,000 locations in over 200 countries, giving it a vast global reach. Ninety percent of its locations are outside of the United States. That said, many immigrants come to this country with the express purpose of sending money back home. The best way to do that is often through a service like Western Union.

A Bloomberg article earlier in the year spelled out how important Mexico is on this score. About 60% of the 11.5 million undocumented immigrants in The United States are from Mexico. China, the Philippines, India, and South Korea accounted for about 9%, combined. While Western Union is working to serve people in all of these countries, right now Mexico trumps China in the money transfer space.

Lost Business

One reason for the share decline in late 2012 was the loss of exclusivity with Grupo Elektra, a key partner in Mexico. When the contract ended, Grupo Elektra agreed to deal with competitor MoneyGram International (NASDAQ: MGI) in addition to Western Union. Another problem was increased regulation, which resulted in the termination of 7,000 of the company's agent relationships in the country.

This one-two punch opened up a big opportunity for MoneyGram, which stepped in with lower prices in an effort to gain market share. Western Union's top line has been lower year-over-year for the past two quarters, clearly showing the impact of increased competition. MoneyGram, however, saw its top line grow year-over-year and sequentially.

Taking Advantage

The Mexico opening was a big part of MoneyGram's strength, but that's not the only reason to like the company. For example, an overly aggressive management team nearly pushed the company into a life and death situation during the global 2007 to 2009 recession. However, with a new, more conservative team in place, the business has gotten the top line back on the growth path and has been working the company toward the black.

MoneyGram isn't really making money yet, but it is moving in the right direction. The shares are up notably this year and it doesn't pay a dividend. So, aggressive growth investors and momentum types might be interested. Western Union, meanwhile, despite its Mexican troubles, still makes plenty of money and has been returning value to shareholders via stock buybacks and dividends.

Western Union yields around 2.9%. It, too, has seen a share advance, but should still be interesting to growth and income investors. It will work through the Mexico issue and, like MoneyGram, has notable long-term opportunities in markets around the world.

The Upstart

One area that both Western Union and MoneyGram are highlighting is the use of the Internet to send money. That's a great opportunity, but also a wide open field. That makes it a double edge sword, since it offers a new way to serve customers but also a new way for competitors to steal market share.

For example, XOOM (NASDAQ: XOOM) offers online transfers and is growing its business quickly. In fact, the company's quarterly revenues have grown 50% over the last year alone. While that's from a small base and the company still doesn't make money, it shows the potential this upstart has to offer investors and the trouble it could cause the old guard.

Plus, without the weight of physical operations, XOOM faces virtually no cost to add new customers to its systems. That makes competing on price a lot easier, particularly as the world increasingly accepts online transactions as safe. Growth investors should take a close look at XOOM's business, since price is a key factor in the money transfer space.

More than Mexico

While each of the companies above provide services throughout the world, Mexico is a key market. Western Union has stumbled badly in the country, giving MoneyGram an opening to gain market share. XOOM, meanwhile, is pushing hard to gain traction with digitally savvy customers. Any weakness at its larger brethren is an opening.

XOOM and MoneyGram are most appropriate for more aggressive investors because neither is profitable at this point in time. Western Union, though struggling at present, has the most appeal for dividend seekers because its brand name still carries a great deal of weight with customers.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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